The Union Budget for FY26-27 is expected to prioritize infrastructure spending and structural reforms over major policy announcements, according to PL Capital's latest report. The brokerage anticipates incremental changes rather than sweeping reforms, as India navigates global geopolitical uncertainty, trade tensions with the US, and slowing private investment. Despite these challenges, India maintains its position as the world's fastest-growing large economy and ranks fourth globally by GDP size.

Economic Growth Projections

PL Capital highlights a mixed growth outlook for India's economy. The firm projects a temporary deceleration in GDP growth to 6.4% in FY25, marking the weakest performance in four years due to subdued private investment, manufacturing slowdown, and global economic pressures.

The recovery in FY26 is expected to be driven by government spending, monetary easing measures, and improving consumer demand, despite external headwinds including punitive US tariffs.

Capital Expenditure Outlook

Capital expenditure is projected to see moderate growth in FY27, with PL Capital expecting high single-digit to low double-digit increases in capex allocations. Government capex rose 28.00% by November on a low base, though overall FY26 spending is expected to remain largely on target with limited scope for upward revisions due to absence of supplementary approvals.

Defence spending is likely to register double-digit growth amid rising geopolitical tensions, supported by Defence Acquisition Council approvals worth nearly ₹3.80 lakh crore in CY25. Sectoral allocation is expected to rotate toward power, roads, infrastructure, water, and sanitation, driven by PPP approvals.

Taxation and Revenue Concerns

PL Capital does not anticipate further rationalization of direct taxes in Budget 2026, following last year's major personal income tax adjustments. The brokerage notes concerns around tax collections, with year-to-date corporate and personal income tax growth remaining below FY26 budgeted estimates, increasing the risk of shortfall in direct tax revenues.

Fiscal Deficit Challenges

The report warns of potential mild slippage in fiscal deficit due to weaker tax collections and higher incentive outlays. While the government aims to meet its FY26 deficit target of 4.40% of GDP, higher interest costs and dependence on RBI dividends will be key variables to monitor. PL Capital emphasizes that fiscal metrics will face pressure from both revenue and expenditure sides in the upcoming budget cycle.

As Budget 2026 approaches, market expectations are gravitating toward capital market tax relief, but industry experts argue for a broader perspective beyond Long-term Capital Gains (LTCG) and Securities Transaction Tax (STT) discussions. With geopolitical tensions and global market uncertainties weighing on investor sentiment, the focus is shifting toward domestic growth levers that can provide sustainable economic support.

Privatization as Primary Priority

Ajay Srivastava of Dimensions Corporate Finance Services presents a clear agenda for the upcoming budget. His primary recommendation centers on privatizing Public Sector Undertakings (PSUs) as the most critical reform needed. Srivastava criticizes the current approach to government capital expenditure, arguing that excessive spending has failed to deliver proportionate economic returns despite heavy investment in infrastructure projects.

"Money is being spent, but not efficiently. Multiple layers of expenditure are not translating into real economic mileage," Srivastava explains, highlighting concerns about infrastructure quality despite substantial government spending.

Consumption and Private Investment Focus

Market expert Sunil Subramaniam takes a macro-oriented approach, suggesting that while markets might welcome LTCG or STT removal for short-term gains, these measures do not address fundamental growth drivers. He identifies two critical areas requiring attention: boosting private consumption and enhancing private capital expenditure.

Subramaniam emphasizes that government capital expenditure has remained consistent, and marginal increases are unlikely to meaningfully alter the growth trajectory. The real challenge lies in encouraging consumer spending, which has remained weak despite income support measures and tax relief in recent years. He believes a consumption revival would naturally stimulate higher private investment levels.

Policy Framework Recommendations

Several strategic initiatives could help achieve double-digit growth levels, according to expert recommendations:

• Expanding the Production Linked Incentive (PLI) framework
• Incentivizing public-private partnerships
• Offering targeted support for private capital expenditure
• Addressing persistently low inflation concerns

Subramaniam also raises concerns about low inflation levels, particularly affecting the rural economy. "We need a bit of reinflation to boost nominal GDP," he notes, cautioning that aggressive rate cuts may not support healthy earnings growth.

Foreign Investment and Domestic Capital Concerns

Srivastava expresses strong criticism regarding tax benefits extended to foreign investors, arguing that substantial concessions have been provided to international entities, including Middle Eastern sovereign funds, with limited long-term capital inflows. "Capital exits tax-free, while domestic companies remain starved," he states, highlighting the disparity in treatment between foreign and domestic investors.

The expert suggests that promoters seeking government support should face higher accountability standards, warning that overly comfortable conditions can suppress risk-taking behavior and fail to revive genuine entrepreneurial spirit.

Promoter Stake Sales Trend Analysis

A significant concern highlighted involves the trend of promoter stake sales, with data from Prime Database and Motilal Oswal revealing substantial divestment activity.

Srivastava interprets this trend as reflecting deeper confidence issues within the business community. "If promoters themselves are selling shares, it tells you they don't believe in their own businesses anymore," he argues. Rather than reinvesting capital into expansion or capacity building, promoters appear to be directing funds toward personal assets instead of productive capital expenditure.

Policy Recommendations and Market Outlook

To address these challenges, experts suggest implementing tougher policy measures:

• Tightening norms around promoter exits
• Encouraging institutional investors to be more selective
• Discouraging mutual funds from purchasing shares from promoters unwilling to invest in their own companies

Srivastava believes such measures would send strong signals about government expectations for corporate behavior and investment commitment.

While markets may respond positively to tax relief measures, the real test for Budget 2026 lies in its ability to revive consumption patterns, attract private investment, and improve public spending quality. The focus on fundamental growth drivers rather than traditional tax cuts represents a shift toward addressing structural economic challenges that could provide more sustainable long-term benefits for the Indian economy.